In times of uncertainty, market shifts can have a significant impact on the economy, and on your portfolio.
Let’s take a look at some do’s and don’ts for how to stay invested in the market.
Do: Take headlines with a grain of salt
When markets are volatile, headlines usually focus on sensational news that grabs your attention. But it’s important to tune out the headline noise. Long-term investing involves defining your goals and putting a strategy in place that fits your situation and tolerance for risk. It means investing in a portfolio of securities or mutual funds that you anticipate owning for a number of years. Markets may be choppy now, but over time, the experience of a long-term investor becomes smoother, with a smaller range of ups and downs.
Volatility of diversified portfolio decreases
Rolling 1-, 3-, 5-, 10-, 20- and 30-year average annual returns from January 1988 to December 2019.
Diversified Portfolio represented by 2% Cash, 43% Fixed Income, 19% Canadian Equities, 20% U.S. Equities and 16% International Equities. Cash represented by FTSE Canada 30 Day TBill Index; Fixed Income represented by FTSE Canada Universe Bond Index; Canadian Equities represented by S&P/TSX Composite Total Return Index; U.S. Equities represented by S&P 500 Total Return Index; International Equities represented by MSCI EAFE Net of Taxes Total Return Index. Source: Bloomberg, RBC Global Asset Management.
An investment cannot be made directly into an index. The graph does not reflect transaction costs, investment management fees or taxes. If such costs and fees were reflected, returns would be lower. Past performance is not a guarantee of future results.
Did you know checking your portfolio every day can lead to poor investment decisions? It’s because of something called loss aversion. Loss aversion refers to the fact that people dislike losing money more than they like making it. So when you look at your portfolio when markets are up, you’ll feel good. But when you look at your portfolio when markets are down, you’ll feel really bad.
This is what prompts some investors to sell when markets are falling – only to watch the recovery from the sidelines. Discouraged by their losses, it takes them a long time to recover their confidence and get back in the market. And that adds up to a lot of missed opportunity.
The overall cost of these actions is staggering, as you’ll see in the chart below. Over the past 20 years, the average balanced fund investor has experienced an annual rate of return that is 3.1% lower than investors who stayed the course.
The cost of taking action in market crisis
Source: DALBAR Quantitative Analysis of Investor Behaviour, 2020. Investment Company Institute. Data as of Dec. 31, 2019. Balanced Portfolio based on 60% S&P 500 in USD and 40% Barclays Aggregate Bond Index. Growth of $100,000 based on investment from January 1, 1999 to December 21, 2019. An investment cannot be made directly into an index. The graph does not reflect transaction costs, investment management fees or taxes. If such costs and fees were reflected, returns would be lower. Past performance is not a guarantee of future results. Average asset allocator fund investor performance results are calculated using data supplied by the Investment Company Institute. Investor returns are represented by the change in total mutual fund assets after excluding sales, redemptions, and exchanges. This method of calculation captures realized and unrealized capital gains, dividends, interest, trading costs, sales charges, fees, expenses, and any other costs. After calculating investor returns in dollar terms, two percentages are calculated for the period examined: Total investor return rate and annualized investor return rate. Total return rate is determined by calculating the investor return dollars as a percentage of the net of the sales, redemptions, and exchanges for each period.
If you’ve already moved out of the market and into cash, you might be avoiding some volatile shifts. However, staying in cash for an extended period of time ultimately chips away at your purchasing power, or how much your money can buy. As the cost of goods increases over time, it could diminish the overall value of your money.
Taking the first step is the hardest part. That said, trying to time the perfect moment to get back into the market is nearly impossible. For some, investing a small amount at a regular pace allows them to gradually re-enter the markets. This is called a dollar-cost averaging (DCA) strategy. DCA can help you create a smoother investment experience. You don’t worry about hitting the perfect moment to get back in the markets.